When Should You Sell An Under Performing Investment?

I invested in a well known technology company about a year and a half ago. I’ve checked the value of my investment at the beginning of each month since, and except for one month, it has lost value every time. Maybe I’m in state of denial since it’s such a well known company that continues to make popular products. I keep thinking that it will eventually turn a corner and increase in value, but when do I say enough is enough? When should I cut my losses and reinvest my money elsewhere?

The reason many people hold on to investments too long is there’s a common belief that all stocks eventually bounce back. When a person looks at the historical graph of the stock market, there may be some bumps but it generally increases over time. The big caveat though is that the markets are an average of successful stocks. While most companies increase shareholder value, certain individual stocks lose value never to return to their previous highs.

Here are three questions that could help you decide whether it’s time to sell that consistent loser in your investment portfolio:

Has The Stock Reached Your Defined Sell Price?

Before making any investment purchase, it’s wise to set a price at which you would cut your losses and sell. A common “bottom” In the financial industry is a loss of 20% from the initial investment at the close of a given day’s trading. One may want to set a different number for themselves, but 20% is a good starting point. Once you set sell price, stick to it!

Editor’s Note: Having a sell rule when investing in individual stocks is a good idea because companies can go bankrupt due to changing business landscapes and/or due to mismanagement. There’s no set rule though, as I’ve heard of others say to sell when a stock dips below 10% of the original purchase price too. We of course always recommend broad market index funds because you don’t have to sell in fear that the value will never come back. There’s no guarantee in life, but betting that the economy as a whole will come back, and thus the index fund’s value will rise back to new highs, is a very good bet to make.

Could The Money Be Better Used Elsewhere?

This is a great question to ask yourself as you watch your investment continually decline in value. Some extra cash on hand may be helpful if you’re thinking about buying a home, thinking of starting a business, or starting a family. When you need money is a great time to sell off some of your less profitable investments and use the funds to enhance your life.

Would You Buy The Stock Now?

Think back to why the stock was purchased in the first place. Was it based on sound investment advice, or was it based on a personal whim? Has the company released financial information since the stock was purchased, such as financial losses or poor sales outlook, that make it less attractive? If you wouldn’t purchase the stock given the current available information, it might be time to cut your losses.

Investments are meant to increase in value over a long period of time, but one should still periodically review each individual investment and weed out those that aren’t performing optimally. It’s easier to hope that an investment will eventually turn around than it is to admit that a mistake has been made. However, wishful thinking isn’t going to make you any money.

Have you reviewed your investments recently? Are you holding onto something you should probably cut your losses and sell?

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I took some profits earlier this year so if I were in this situation, depending upon the size of the drop, I’d take a tax loss and buy a similar name on the same day. What you describe is far from unique, it’s not hard to find solid tech companies sporting single-digit PEs plus a decent dividend to boot. In fact, if not for the need for tax loss harvesting, I’d probably keep the shares and buy more if the drop was large enough and my own outlook was unchanged.

One thing I would not do is sell these losing shares and plow the proceeds into the FANGs who were the big winners this past year. Why would I want to exchange up to triple-digit PEs and zero dividends? I’d rather hold cash than pile into these names.

Tax loss harvesting is a good tax saving maneuver but the move could be dangerous with individual stocks because there are no two companies which are exact enough where their stock market values will be identical.

Having said that, exchanging into another company could still work in your favor if the loss was big enough. Just make sure you know what you are doing!

And as to the FANGs, who knows how long the run will last? Good luck for those of us who want to bet on what’s essentially an unknowable outcome.

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